The committee said: 'It’s not at all clear that the government’s sale of Royal Mail has brought an adequate and appropriate return for taxpayers.' Photograph: Oli Scarff/Getty Images

Taxpayers lost out on £1bn because the government and its City advisers underpriced the privatisation of Royal Mail, a committee of MPs says today.

In a highly critical report, the Business, Innovation and Skills (Bis) committee said the government worried too much about pushing the privatisation through at the expense of getting the best price for taxpayers.

Royal Mail was privatised in October when the government sold 60% of its stake at 330p a share, valuing the company at £3.3bn. On their first day of trading, the shares jumped by 38% – far higher than normal for a flotation – and continued to rise after that. They hit a high of 615p on 15 January and closed at 474p on Thursday, valuing Royal Mail at £1.4bn more than the sale price.

In evidence to the committee, Vince Cable, the business secretary, and his minister Michael Fallon defended the sale price by saying the risk of a nationwide strike hung over Royal Mail during the privatisation, making investors wary about the company's prospects. Royal Mail and the Communication Workers' Union (CWU) settled their long-running dispute soon after the flotation in an agreement that promised a new era of industrial harmony.

Cable dismissed the post-privatisation rise in Royal Mail's share price at the time as "froth" that would settle once the market had judged the company's value. The committee criticised Cable for not defining froth properly and for stretching the period he had in mind from the "immediate aftermath" of the flotation to months or years later.

Adrian Bailey, chairman of the committee, said: "It's not at all clear that the government's sale of Royal Mail has brought an adequate and appropriate return for taxpayers. The government cannot blithely dismiss as 'froth' our committee's concern that the low issue price of this prime public asset has cost the taxpayer around a billion pounds."

Cable's department said the privatisation raised £2bn for taxpayers and put Royal Mail on a secure footing as a publicly traded company able to raise capital from the market. It said the report ignored the size of the share sale and included factual errors.

The department said: "The committee's views on the share price are based entirely on hindsight and ignore that we were selling 600m shares – they found no evidence that the department or its advisers missed vital information prior to sale. The share price remains very volatile to this day, as the business secretary told the committee, and has dropped 25% from its high point."

The National Audit Office (NAO) has criticised Cable for refusing to increase Royal Mail's flotation price despite widespread fears the 500-year-old company was being sold on the cheap. He has refused to apologise and still describes the privatisation as a success.

But on Wednesday, with the committee's report looming, Cable announced a review of the privatisation process, headed by Lord Myners, a City veteran and minister in the last government.

The MPs were also scathing about the role of Cable's investment banking advisers – Lazard, Goldman Sachs and UBS – as well as the shareholder executive, the government team that works on privatisations. In evidence to the committee, the advisers insisted they had got the best deal possible, despite admitting they had considered recommending the government to seek a higher price from investors.

The advisers' work on the privatisation was "not up to standard" and did not get the best deal for taxpayers, the MPs said.

The report, backed unanimously by MPs from the three major parties, criticised Cable's attempts to secure long-term investors for Royal Mail by giving preferred status to certain fund managers. They singled out Cable's unwillingness to publish the list of investors until the day before he appeared at the committee and called for more information about those that had sold their stakes.

The government also ignored NAO recommendations about the treatment of three large London sites included in the sale. The NAO argued for their exclusion from the sale or for provisions for the government to get money back from their later sale. After the privatisation, the NAO said the government's £200m valuation of the sites underestimated their worth.

Bailey said: "This was the most significant privatisation in years. We believe that fear of failure and poor quality advice led to a significant underestimate of the demand for Royal Mail shares. The government's inclusion of Royal Mail's 'surplus' assets in the sell-off, without the prospect of clawing back future proceeds, may also mean the taxpayer losing out once again."

Billy Hayes, general secretary of the CWU, which opposed privatisation, said: "The Bis select committee's damning report published today shows the extent of the government's incompetence in the privatisation of Royal Mail. The only froth came from Vince Cable and Michael Fallon's allegations that threat of strike action from the CWU last summer affected the share price."

The committee accepted that the government succeeded in privatising Royal Mail in this parliament and giving employees a stake in the business but said it failed to achieve its third aim of securing value for money.